U.S. markets closed
  • S&P 500

    3,335.47
    -16.13 (-0.48%)
     
  • Dow 30

    27,452.66
    -131.40 (-0.48%)
     
  • Nasdaq

    11,085.25
    -32.28 (-0.29%)
     
  • Russell 2000

    1,504.73
    -5.62 (-0.37%)
     
  • Crude Oil

    39.11
    -1.49 (-3.67%)
     
  • Gold

    1,903.00
    +20.70 (+1.10%)
     
  • Silver

    24.34
    +0.74 (+3.14%)
     
  • EUR/USD

    1.1743
    +0.0074 (+0.63%)
     
  • 10-Yr Bond

    0.6450
    -0.0180 (-2.71%)
     
  • GBP/USD

    1.2862
    +0.0021 (+0.16%)
     
  • USD/JPY

    105.6530
    +0.1340 (+0.13%)
     
  • BTC-USD

    10,787.34
    +84.84 (+0.79%)
     
  • CMC Crypto 200

    221.95
    -7.73 (-3.36%)
     
  • FTSE 100

    5,897.50
    -30.43 (-0.51%)
     
  • Nikkei 225

    23,539.10
    +27.48 (+0.12%)
     

Edited Transcript of MGR.AX earnings conference call or presentation 20-Aug-20 12:30am GMT

Full Year 2020 Mirvac Group Earnings Call

Sydney, New South Wales Sep 2, 2020 (Thomson StreetEvents) -- Edited Transcript of Mirvac Group earnings conference call or presentation Thursday, August 20, 2020 at 12:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brett Draffen

Mirvac Group - CIO

* Campbell Hanan

Mirvac Group - Head of Office & Industrial

* Shane M. Gannon

Mirvac Group - CFO

* Stuart Penklis

Mirvac Group - Head of Residential

* Susan Lloyd-Hurwitz

Mirvac Group - CEO, MD & Executive Director

* Susan MacDonald

Mirvac Group - Head of Retail

================================================================================

Conference Call Participants

================================================================================

* Darren Leung

Macquarie Research - Analyst

* Lauren A. Berry

Morgan Stanley, Research Division - Equity Analyst

* Richard Barry Jones

JPMorgan Chase & Co, Research Division - VP

* Sholto Maconochie

Jefferies LLC, Research Division - Equity Analyst

* Tom Bodor

UBS Investment Bank, Research Division - Director

================================================================================

Presentation

--------------------------------------------------------------------------------

Susan Lloyd-Hurwitz, Mirvac Group - CEO, MD & Executive Director [1]

--------------------------------------------------------------------------------

Good morning, and welcome to our FY '20 results presentation. Thank you very much for taking the time to be with us this morning. We're meeting here today, socially distant, on the lands of the Gadigal people of the Eora Nation. I pay my respects to Elders past and present. With me today is Shane Gannon, Brett Draffen, Campbell Hanan, Susan MacDonald and Stuart Penklis. Along with the rest of the executive leadership team and the Board, their combined experience, dedication, energy and exceptional leadership enabled us to respond swiftly and effectively when we were plunged into what can only be described as an exceptionally challenging year.

The extreme social implications of the pandemic have transformed the world in the space of a few months. We are extremely thankful for Australia's medical frontline and other essential workers at this time. And our hearts go out to those that are (inaudible) has also been substantial. Every sector has been affected, and Mirvac is not immune. Since March, we've been learning to live and work in a COVID-19 environment. That's been tough for everyone and will continue to be tough for some time to come. But a recovery will emerge, I believe in the extraordinary ingenuity and creativity of humanity. I witnessed this every single day in how Mirvac people care for each other, for our customers and our communities, including the most vulnerable.

New ways of charting our national course are also emerging. We welcome the more open discussion and collaboration between corporate Australia and Government at all levels when policy is developed and implemented. And I'm confident that Mirvac will respond to this health and economic crisis in ways that see us emerge stronger and more determined than ever to be a force for good. It's a fundamental responsibility of all good companies to prepare themselves for adversity. And we spent much of the last 7 years doing exactly that.

We have a vibrant culture. I shouldn't have used this technology. We have a clear purpose, a vibrant culture with 90% staff engagement, entrenched flexible working, shared values, a strong balance sheet and a high-quality, young commercial portfolio with a long WALE and low CapEx, largely created by us. We also have a significant pipeline of opportunities where we can deploy our award-winning asset creation skills to leave a positive legacy and generate shareholder wealth into the future. There is no playbook for the times we're operating in. And our responsibility to our security holders, our employees, our customers, our communities and the planet remain unwavering. We are continually monitoring a range of scenarios and adjusting, focusing our efforts on those areas in which we can have an impact acting according to our values and our purpose. And so doing, we're guided by these principles: health and safety come first, everything else follows; make all decisions in accordance with our established values, such as put people first and do the right thing; be prepared to operate for a considerable time in adverse circumstances; be transparent and act compassionately and fairly with our customers; support all our people in their individual circumstances; act with decisiveness even in incredibly opaque situations; and work with Governments and across sectors to play our part to help Australia to an eventual recovery.

We acted swiftly and decisively in response to the crisis. We moved to remote working where possible on the 16th of March and put in place protocols to ensure that our assets and sites could operate safely. We significantly increased communication with our employees and our customers. We've put in place a special leave policy and supported our people to set up the right equipment in their home, which suddenly became an office, a school, a gym and a bakery. The ELTM Board took a 20% pay cut from April to July. And the overwhelming majority of Mirvac people voluntarily reduced their hours in order to preserve jobs. We reduced nonessential spending. We canceled the FY '20 STI program, put in place $810 million of new debt facilities and worked with our customers to support their COVID-safe plans and provide rent assistance.

Despite the very challenging conditions, our operating metrics are solid, as you can see on this slide. Earnings metrics were impacted with operating profit declining 5%. But the balance sheet is strong, and NTA increased -- sorry, I'm going to give up on that, and I'm going to the old-fashioned bit of paper. By the quality of the portfolio and the delivery of new modern assets supported an increase in NTA to $2.54. I am very proud that Mirvac has been so resilient in this extraordinary context. During the year, we delivered 6 major new urban assets, 4 of them completing or settling in the last 4 months; on budget, which is truly extraordinary. These 6 assets have 100% end value of $3.3 billion. Over FY '18 to FY '20, we've delivered a record 300,000 square meters of new leasable space. And as Stuart will detail, we continue to settle with our residential customers throughout the year, reaching our target of greater than 2,500 lot settlements with a low default rate of 2.2%.

We also continue to sell land, homes and apartments right throughout the year, even when the physical offices were closed, with 874 exchanges since the beginning of March. The development pipeline is going to re-base in FY '21 and '22 with the delivery of the locomotive workshops at South Eveleigh and our first build-to-rent asset LIV Indigo at Sydney Olympic Park, which we opened yesterday, followed by 80 Ann Street in Brisbane, which is largely pre-let along with our industrial development at Auburn in Sydney.

Looking further to the future, our secured uncommitted pipeline has the potential to deliver 750,000 square meters of NLA across mixed-use, office, industrial, BTR and retail developments, further supporting future growth in high-quality passive income. Profit and new NOI from this future pipeline will start to emerge by FY '23. Our pipeline now totals $23 billion, comprising $5.7 billion in office and mixed use developments, $1.2 billion in industrial, $1.3 billion in build-to-rent and $15.6 billion in residential. This represents the continuation of our successful urban asset creation strategy to create, own and manage across multiple sectors.

What is absolutely key is that this pipeline gives us flexibility to respond to market conditions. We will only commence projects when the time is right. The majority of our development pipeline has income in place or has been purchased on capital-efficient terms. And we are going to continue to work with our capital partners to de-risk and fund future opportunities. We know that how we work matters and no matter what the circumstances, we will continue to prioritize health and safety, our people, sustainability and innovation. We continue to meet or exceed our targets around health and safety. And this year, refreshed our design out our risk procedures to further enhance safety. Throughout the pandemic, we've continually conducted pulse checks to understand how our people are feeling and how we need to respond. Consistently, 97% of our people say that they are proud to work for Mirvac.

As you know, sustainability is one of our great passions. During the year, we met some key milestones under our This Changes Everything strategy. We reduced our carbon emissions by 60% and released our plan to reach 0 waste to landfill by 2030. Not only is this inherently good for the earth, but it will save time and cost and reduce risk. We continued on our journey to increase social procurement, so we can use our purchasing power support to support unemployment -- to support employment of marginalized groups. A great example of this is at South Eveleigh, where we've partnered with Unreal Steel, an indigenous rigging and fabrication business. Some of you might have seen a recent LinkedIn post about the story. If not, I encourage you to take a look.

Being able to innovate is absolutely essential in times like this. I'm proud that during the year, we were ranked #7 in Fast Company's World's Most Innovative Companies globally in the real estate sector; and #1 Most Innovative Real Estate Company in Australia by AFR Boss. Mirvac was strong before the pandemic disrupted our world. And as we're working through this time, I'm confident that we will emerge even stronger. Whatever the future holds, we will continue to adapt as people and as a company, and we will live up to our aspiration to leave a positive legacy in Australia's cities.

Thank you, and I'll now hand over to Shane to walk through the financial results.

--------------------------------------------------------------------------------

Shane M. Gannon, Mirvac Group - CFO [2]

--------------------------------------------------------------------------------

Thanks, Sue, and good morning, everyone. The Mirvac Group's FY '20 financial results are a blend of 8 months of very strong performance in 4 months when the world turned upside down. And we will plunge into exceptionally challenging times. Our results released today reflect the material impact caused by COVID-19 and the steps taken to recognize its financial impact to Mirvac's earnings and balance sheet. However, it is also worth highlighting some positives, namely, the underlying strength of Mirvac's diversified business model, particularly the cash flow supported by high-quality passive assets, and equally important, the strength of Mirvac's financial position from the perspective of balance sheet and capital management.

Management's actions before COVID and subsequently, I believe, ensure the business is positioned appropriately. Not only during these current uncertain times, but also to be in an optimal position to respond to whatever might lie ahead.

Commenting on the Mirvac Group's performance. Operating profit after tax for FY '20 financial year, $602 million, represents a 5% decline versus the FY '19 performance. Given the disruptive nature of COVID to operating earnings, I will leave to specific divisional performance commentary to Campbell and Susan and Stuart. However, I underline the point that pre-COVID accounting adjustments, all divisions were achieving their operational targets. In the corporate area, $41 million, represents an 8% increase from the prior financial year. Although there are a number of contributing factors, the main variances are the reduction in Travelodge Hotel income, approximately $6 million due to the dramatic fall in occupancy rates, but offset by overhead savings from the management decisions taken response to COVID and the receipt of Government subsidies. Pleasingly, adjusted funds from operations of $572 million is up slightly compared to FY '19 despite lower operating profit in the year. This reflects our focus on preserving cash through the reduced spend on maintenance CapEx and lower tenant incentives across the investment portfolio

As I mentioned earlier, the FY '20 financial results include a number of COVID-related impacts, and this slide provides a reconciliation between our previous market earnings guidance of $0.176 to $0.178 per stapled security to $0.153 being reported today. The slide illustrates the movements and can be summarized into 3 main areas: firstly, the direct and associated COVID-19 impact, which represents an $86 million net adjustment to FY '20 earnings or approximately $0.022 per stapled security. Within that amount, the main contributors were consistent with code of conduct, rental assistance or expected credit loss provisions, predominantly to SMEs have been included. The total of rent assistance to $48 million is predominantly in retail. Approximately $40 million, which represents an estimate of 15% of retail's annual billings. The other adjustments stems from a management review of new business expenditure and future project schemes in a COVID-19 environment. Impact of this review is approximately $23 million in write-downs. And the second major area of adjustment was timing differences that relate to the recognition of development income. This mainly relates to our Melbourne MPC projects such as Tullamore and Woodlea, with $32 million of profit shifting out of FY '20 and into subsequent financial periods.

The third area involves actions taken by management to partially mitigate the COVID-related impacts, which Sue highlighted in her earlier comments. In aggregate, these measures have had a $29 million positive net impact.

From the outset, Mirvac's priority in dealing with COVID is to ensure appropriate support is provided to our business customers, particularly our SME tenants. Clearly, the retail sector has been the most affected. And within the Mirvac portfolio, over 1,200 individual tenant negotiations have either completed or are work in progress. During the year to June 2020, rental assistance either negotiated or estimated, including allowances for expected credit losses totaled $48 million and have been expensed in determining the FY '20 operating profit. The graph depicting cash collection highlights the effect during the COVID period, particularly the fourth quarter. On a positive note, the cash collection rates have improved as tenants negotiations have been completed, with 90% of second half '20 portfolio billings now collected.

Mirvac's capital position remains robust, and our capital management strategy continues to focus on: one, diversifying our capital sources; two, increasing the long-term debt; and three, limiting debt expiries in any one year. As a consequence of this strategy, as I've mentioned earlier, before COVID and then during the crisis, we have focused on maintaining a strong capital management position. Key indicators are the actions taken to increase Mirvac's debt facilities by $810 million, during the COVID period, have further strengthened our cash and undrawn debt facilities position at June to $1.4 billion. Our 6.7 year average debt maturity profile without significant debt maturities until FY '22 support our solid and stable balance sheet position. And gearing of 22.8% remains at the low end of our preferred range of 20% to 30%, and is complemented by our credit ratings, which remain unchanged with a stable outlook from the A3 Moody's rating and the A minus Fitch rating. These key indicators, I believe, reinforced my comments earlier about the strength and resilience of Mirvac to withstand the current uncertainty caused by COVID-19.

Finally, I mentioned earlier that a focus over the near term, given the uncertain times we operate in will be the generation and the preservation of cash. The group's payout for FY '20 of 59% is well below the FY '19 result of 68%. But given the current environment and the importance of capital management, we believe the total distribution of $0.091 per stapled security is appropriate. As in previous years, FY '21 distributions will continue to be funded with operating cash flows. This will be underpinned by the ongoing net operating income growth within our office and industrial portfolio, driven by recent asset development completions such as South Eveleigh and 477 Collins Street, plus future development completions at Locomotive Workshop and 80 Ann Street in Brisbane. As you can appreciate, given the uncertainty in relation to the duration and impact of COVID-19, we are unable to provide guidance for FY '21 at this stage. However, our intention will be to continue funding our distributions from operating cash flows and targeting a payout ratio of 65% to 75% of operating earnings within our policy to distribute up to 80% of operating earnings.

So in conclusion, whilst today's financial results are different to those we expected to deliver when FY '20 market guidance was provided in February. I'm proud of everyone at Mirvac. The way we've come together to deal with an extremely confronting situation, and ultimately position the group in a way that ensures we are able to respond to these challenging times.

And on that note, I'll hand over to Brett. Thank you.

--------------------------------------------------------------------------------

Brett Draffen, Mirvac Group - CIO [3]

--------------------------------------------------------------------------------

Thanks, Shane, and good morning. Despite the volatility post-COVID, FY '20 has witnessed a sound year with disciplined allocation of capital against our strategy, a strategy that recognizes the underlying strength of Mirvac's integrated model to create long-term value in targeted urban locations. A key element of this approach is our focus on the 2 deepest markets of Sydney and Melbourne, whilst remaining agile to tactical opportunities in Brisbane and Perth. Approximately 80% of our capital was allocated to Sydney and Melbourne, an approach that we remain confident will deliver sustainable returns over time, given these markets represent the largest and deepest employment markets and the main contributors to Australia's GDP and growth.

Our investment portfolio has grown on the back of project completions to $12.1 billion, with a continued focus on modern, long-WALE, low-CapEx office, a growing Sydney focused industrial exposure, a committed BTR pipeline and a focused urban retail strategy. Within our development activities, our active capital base remained stable at $1.7 billion, reflecting the continued delivery of our pipeline and a disciplined stance on restocking in an environment of increasing opportunities. In addition to our own balance sheet, we continue to utilize our asset creation skills to invest with a aligned group of capital partners. And it's pleasing to see our continued momentum within our external assets under management, which have now increased to $9.4 billion. Although COVID has introduced significant volatility in our FY '20 returns, primarily due to operational and valuation movements in the retail portfolio, we remain confident, our passive portfolio is well placed to weather near-term challenges and that our active portfolio remains well positioned with sound embedded margins. Whilst the group's 3-year ROIC -- rolling ROIC at 8.9% continues to well exceed our cost of capital, it is clear that the pandemic has resulted in the second half underperformance with the results in FY '20 ROIC at 5.2%. Contributors to this ROIC are not uniform, with office and industrial delivering a strong result across both operating and nonoperating measures, leading to an overall 9.1% return. As you would expect, the majority of underperformance has been in the retail portfolio, with nonoperating valuation decreases as the main driver. Although the negative ROIC performance in retail was majority COVID impacted, it should be remembered that we continue to manage some assets such as Harbourside for future development with the resultant penalty to near term returns. As forecast, the residential business has seen ROIC improve on last year's levels, with some significant project completions such as at St Leonards in Sydney and strong performances from our master planned communities. Although overall ROIC did improve, the combination of some settlement timing delays moving into FY '21 and additional capital allocated to selective restocking of our pipeline has seen some minor deterioration in the second half. At a time of great uncertainty, it is worth reflecting on our track record of capital deployment as we continue to remix our portfolios. This has included the disposal of over $3 billion of nonaligned assets, all at premiums to book value over the past 7 years. Recycling these proceeds into the creation of new assets to improve portfolio quality and drive active development and investment management earnings.

Consolidation of our early moving advantage into the build-to-rent sector; a greater weighting to mixed-use projects with $3.4 billion of secured pipeline, including South Eveleigh, Waterloo Metro Quarter and Harbourside, which pleasingly this week has been confirmed to progress into the final stage of the unsolicited planning process; and the accelerated deployment to our industrial portfolio with a further $1.2 billion of secured projects, including Auburn, Kemps Creek and Badgerys Creek. The chart on this slide depicts the growing diversity of our future pipeline, and it is an example of Mirvac continuing to play to its strengths, creating long-term value for security holders through asset creation rather than acquiring fully priced passive assets on market.

The past year has seen Mirvac further progress its early mover advantage into the build-to-rent sector, with a committed future pipeline now in excess of 1,700 apartments. Our management platform is now fully operational. We're staffing and customer-facing technology in place to ensure a global best practice experience. BTR has long been a strong performing asset class in overseas markets, and post-pandemic has proven resilient in terms of operating earnings and has seen further tightening of cap rates. We maintain our investment thesis for the Australian market and to date have committed in excess of $200 million of capital in the progressive rollout of new projects with a forecast end value of $1.3 billion. In the medium to longer term, we restate our target to grow the portfolio to approximately 5,000 apartments. As we stand here today, we have now entered the intense leasing phase in the run-up to the September opening of the first asset, LIV Indigo. It is pleasing to report to date the customer inquiry and feedback, pre-leasing and rentals achieved are all consistent with our underwriting.

It's also pleasing to see continued momentum to establish BTR as a true investment-grade asset class in Australia. The combination of current global and domestic capital commitments, combined with the recent REIT leadership from the New South Wales Government through targeted incentives bodes well for an acceleration of the sector to help shoulder the recovery of the economy. And deliver future opportunities around housing choice.

I'll now hand to Campbell to detail the office -- the results for Office and Industrial.

--------------------------------------------------------------------------------

Campbell Hanan, Mirvac Group - Head of Office & Industrial [4]

--------------------------------------------------------------------------------

Great. Thanks, Brett, and good morning. O&I continues to perform despite the challenges of trading in a new COVID world. We enjoy sector-leading WALE, minimal CapEx, touchless and frictionless smart technologies and a portfolio anchored by significant corporate tenants. We have collected 98% of our rental billings for FY '20, including 93% of the office portfolio income in the last quarter. Our exposure to risk tenants is relatively low, with only 2.3% of our income associated with small office enterprises and less than 1% of income exposed to co-working. In the first half, we reiterated 4 key areas of focus for the business: firstly, to continue to deliver NOI growth; secondly, to create one of Australia's most modern office portfolios; thirdly, to de-risk the future lease expiry profile; and finally, to make progress on the planning outcomes for the future development pipeline. We're happy to report that despite the significant disruption of COVID, we have made progress on all of these priorities. As Shane mentioned, the office portfolio remains resilient to the impact of COVID and has enjoyed strong operating metrics. NOI was up 3% to $348 million, led by a 3.8% increase in like-for-like income.

Occupancy remained significantly higher than the markets we trade in at 98.3%. We completed approximately 48,000 square meters of leasing deals at positive spreads of 11.5% and average incentives of 19.4%. Approximately 60% of the portfolio was externally valued during the year, delivering net gains of $282 million, up 4% for the year. Valuations undertaken in the second half were also positive, accounting for 1% of the annual growth. Maintenance CapEx remains low at just $16 million or 22 basis points of portfolio value, reflecting the young and modern nature of the portfolio. And our WALE remained steady at 6.4 years with our expiries in FY '22 and FY '23 at 8% and 7%, respectively. We believe this will hold us in good stead, given the changing market conditions we're now experiencing. We recently completed the Olderfleet development in Melbourne and the second CBA building at South Eveleigh. Both of these assets were major contributors of the development EBIT for the year, totaling $80 million. These assets will enter the portfolio this half, delivering NOI, valuation growth, WALE and some residual development profits.

Looking forward, our development assets under construction at 80 Ann Street, Brisbane, and the Locomotive Workshop at South Eveleigh remain on time and on budget. 80 Ann Street was previously sold down to 50%, and the sale of an interest, 50% interest in the Locomotive Workshop is scheduled this financial year.

Turning to the industrial business. We see this asset class as 9 of the few beneficiaries of COVID-19, as online retail sales accelerate, supply chain discussions lead to a buildup in inventory warehousing and increased focus on onshore manufacturing, automation and the growing distribution needs for essential services. The industrial portfolio has also delivered resilient growth. NOI was up 1.9% to $54 million, leading -- including like-for-like growth of 1.1%. WALE has been maintained at 7.5 years, 7.4 years. 43,000 square meters of lease deals were completed during the year at positive leasing spreads of 4.8% and average incentives of 8.9%, and approximately 45% of the industrial portfolio was valued independently in the half with the portfolio gaining $34 million for the year, up 3.7%.

Our attention is now focused on the development pipeline. We have received development approval for our 70,000 square meter last mile development at Auburn in Sydney's in our west. Demolition is underway with construction to commence next calendar year. Our 56-hectare site at Kemps Creek and Sydney's outer west has also received rezoning approval with planning approvals for a 250,000 square meter industrial park now lodged. We anticipate earnings contribution to commence for both of these assets in FY '22. In the past, we have typically sold at least a 50% interest in our development assets as part of our development EBIT recognition. However, in light of the growing demand for industrial assets, we are reviewing a higher ownership allocation for these developments going forward. Our final development opportunity, the 54-hectare site at Badgerys Creek is located 800 meters from the new Western Sydney Airport within the Aerotropolis area for which rezoning is being considered as part of the latest tranche of the Government's fast-tracking assessment process.

Our recent completion of the second CBA asset at South Eveleigh is a highlight in our maturity as a major commercial developer. Its design is reflective of the new workplace, which has become even more relevant in a post-COVID world. Large and efficient floor plates catering for density, changing working environment, supporting collaboration spaces, task work and staff interaction. The most modern touchless and frictionless technologies and absolute focus on sustainability and a unique and curated retail precinct. It has also delivered real value for Mirvac, a 15-year income stream from CBA and attractive return on cost and very attractive development returns. This asset will deliver income later this calendar year and will be externally valued in December. Our asset creation capability has become an important differentiator for our business. Since 2014, we have completed 9 office projects and 5 industrial assets worth $4.1 billion, with significant contributions to NOI, NTA gains and development EBIT. Restocking the development pipeline and getting the portfolio a shovel-ready for the next cycle has been a key priority for the last 18 months. Pleasingly, the pipeline continues to expand, with 2 assets under construction and a series of office, industrial and mixed-use future opportunities now secured. Good progress has also been made on the future office pipeline with planning applications now submitted for a 60,000 square meter tower at 55 Pitt Street in Sydney and a 45,000 square meter tower on Spencer Street in Melbourne CBD. We are also planning to lodge an application for a 30,000 square meter tower above the new Waterloo Metro station in coming months. These development opportunities will allow us to respond to the changing needs of our customers and will only commence on the prudent level of precommitment.

Turning to the future of office and the impact of COVID on the way business works. We remain firmly of the belief that the office will remain relevant in the future. Our customers are telling us the office is vital for building culture. It's critical for osmosis learning, particularly for younger members of the workforce, and it's important for networking and innovative thinking. However, not all office will be equal. Floor plate size, building hygiene, flexibility of inter floor travel, data-driven occupation and above all, a change in office layout will lead to an evolution in office occupation. We believe this new way of work will support our bespoke development capability and our recently created portfolio.

I'll now hand over to Susan MacDonald for the retail update.

--------------------------------------------------------------------------------

Susan MacDonald, Mirvac Group - Head of Retail [5]

--------------------------------------------------------------------------------

Thank you, Campbell, and good morning. It will come as little surprise that Government advice and mandated measures in response to the pandemic have significantly impacted the performance of the retail sector over the last quarter. Some of these factors include physical distancing, mandated store closures and weeks of only visiting centers for the purchasing of essential services. These factors, combined with highly sensitive consumer sentiment have resulted in significant shifts in consumer behaviors, particularly in Sydney and Melbourne. At all times, our priority has been the safety of our people, particularly our center teams, retailers and our communities. The agile and innovative approach that has been demonstrated by our teams in response to these unique set of circumstances, has truly been an inspiration and has created some great learnings. The past few months have challenged all of the retailing principles that have underpinned our successful urban portfolio with density and mass gatherings have been key pillars in the drivers of past portfolio metrics. Our response to COVID-19 Government restrictions was framed in the context of supporting retailers in the categories that were going to be the most impacted, particularly the most vulnerable retailers to ensure we would collectively be positioned to recover and thrive once restrictions were lifted.

As a result, you can see in the NOI waterfall, the significant financial support that has been recognized in late FY '20. Additional support is also expected to continue well into FY '21 as the end of restrictions are unknown. 58% of retail rent has now been collected for Q4 with 54% collections in July. Impacted retailers continue holding back rental payments until rental assistances agreed, resulting in choppy cash flows as we work through discussions. Pleasingly, we've now completed over 30% of our current negotiations with another 20% well progressed.

Given the economic uncertainty and reduced traffic numbers through centers, revenue leakage has been negatively impacted by extended tenant downtime and variable income streams. This has been partially offset by operational efficiencies during the restricted trade. The challenging economic and operating environment has reflected in our valuations with a full year write-down of 9.1%, representing $315 million of lost value. Our 3 CBD centers were the most impacted, obviously due to the closure of workplaces and the cessation of conference and tourism markets. The remainder of the portfolio of 13 assets had a full year write-down of 7.2%. The valuation assumptions adopted reflect reduced growth, softer short-term leasing assumptions and an extended period of COVID-19 support. Our operating metrics have also been impacted with occupancy declining to 98.3%. Store openings at June 30 were at 92% or 95%, including CBD assets. Those categories not training at June 30 included entertainment and travel associated tenancies. Leasing spreads have been negative since COVID-19 restrictions were first introduced, albeit on very low volumes.

We have seen emerging asset performance in the current market, driven by location and size. Limited mobility and work-from-home has dispersed spend into the suburbs away from CBD working hubs, benefiting centers with strong primary trade areas. Encouragingly, we have seen examples, both onshore and offshore that where confidence returns, meaning it is considered safe and then virus is assumed controlled, customers are returning. Some of our centers are seeing near-normal traffic numbers, particularly in Southeast Queensland. We're seeing strong trading categories of fresh food, essential services, hobbies and leisure, reflecting consumer priorities during restrictions. Not surprisingly, food catering and entertainment businesses are under substantial stress. The chart on the right reflects our income diversification based on retail categories, showing the proportion of income represented by SMEs and sales performance of respective categories. The SME retail is the highest impact of sales and profitability have been prioritized in our retailer support discussions with the spirit of the code of conduct at the forefront of these discussions.

Our interactions with retailers haven't just been about financial support. Our team conducted a series of interviews with our retailers and customers in May this year to better understand how the pandemic would change the landscape of our industry in the immediate term and into the future and how we might meet that change together. The topics to sales concluded how retailer strategies have adapted to COVID, how consumer behaviors have changed and which of these changes are likely to stick, operating model considerations and how life priorities have recalibrated. What has been very clear in these conversations is that the old ways will not suffice for the future. There is no going back to before-COVID and we don't know what after-COVID looks like or when it will occur.

Retailers have learned that they must rapidly digitize. And while seeing the store as a valuable part of their retail ecosystem, they will continue to work through how many stores and the best locations to assist customer experience and fulfillment. Customers are shopping with greater purpose, such as supporting local businesses and having a far more hyper-local focus driven by increased time spend at home. We've also learned as managers we can respond quickly to address customer fears and assist local retailers in navigating hurdles in innovative and cost-efficient ways. For example, in working with our Hatch innovation team, we co-created with our local retailers, the Essentials Express concept, addressing an access convenience gap during early lockdown restrictions. The idea was to just put our retailers, particularly those who didn't have an online presence.

In summary, the operating environment remains uncertain. While we're seeing a steady recovery in performance in line with returning confidence from April to June, the spike in July cases demonstrates just how fickle the economy is. What we do know is, as we've seen case numbers decline and communities gain confidence in their safety, mobility increases back into shopping centers. And whilst online market share is growing, it's being rapidly offset by redistribution of outbound tourism and CBD workers spend in the city suburbs. We have also seen a continued desire for customers to shop in physical stores as online market share retreated somewhat when restrictions have subsided. Specialty sales performance is lagging store reopenings, with many stores trading on reduced hours to minimize employee costs. With the uncertain outlook, it's not surprising that there have been minimal traditional leasing deals completed over the last quarter, with short-term lease extensions becoming more commonplace.

Our focus is very much on preserving cash flow and occupancy. And whilst this includes deferral of most non-essential CapEx, this is balanced with opportunistic investment where we see long-term value and strategic merit, such as co-creation opportunities with like-minded retail partners who have a positive eye to the future of retail.

Given the challenging economic and operating environment, this weighs significantly on the outlook for retail in FY '21. However, the active portfolio management and strategic investment in pre-COVID times means we have a collection of urban assets that are well placed to survive and thrive when the economic -- sorry, when the environment improves, and we enter the next evolution of the retail landscape.

Thank you, and over to you, Stuart.

--------------------------------------------------------------------------------

Stuart Penklis, Mirvac Group - Head of Residential [6]

--------------------------------------------------------------------------------

Thank you, Susan. I'm very pleased to report that despite the extremely challenging conditions of the last quarter, we settled a total of 2,563 lots during the year, including a record 1,130 apartments. This settlement record is testament to the valued product Mirvac delivers and the ability of our purchases to continue to transact through the cycle. Despite headwinds we have delivered $225 million of EBIT, which is up more than 12% on the prior year. Gross margins remained strong at 24% and defaults remained low at 2.2%. An 87% reduction in unsold inventory from FY '19 has allowed us to strategically redeploy capital as opportunities have presented themselves.

I'm incredibly proud of the Residential business' ability to respond quickly to the challenges presented by COVID. Our construction sites continued uninterrupted, delivering 745 settlements in the fourth quarter, while our sales platform went digital, delivering over 472 sales. We achieved 1,846 sales during the year despite multiple challenging external factors and carry nearly 500 deposits and conditional exchanges into FY '21 off the back of very strong demand for federal and state stimulus. Our focus on owner occupiers has delivered continued resilience as these purchases now more than ever value the quality, design excellence and amenity in our projects.

Mirvac's continued focus on every detail has differentiated our product and delivered resilience through the COVID period. We continue to invest early in both social and physical infrastructure, such as parks, schools, community facilities, amenity that has become even more value defining in the current environment. While presales have fallen just below $1 billion, this is a direct result of continuing to settle a significant number of apartments sold earlier in the cycle and a decision to be patient and disciplined to not restock at the height of the market.

Restocking remains a key focus as opportunities continue to emerge. The impact of COVID-19 will further improve buying conditions as competition for sites diminishes, particularly from overseas capital, and other developers whose balance sheets won't be in a position to take full advantage of these opportunities. We are benefiting now from the well-timed execution of this same strategy during the previous cycle's low point, and are now repeating this strategy for future benefit.

We added over 2,600 lots to our pipeline during the year across both apartments and MPC, offsetting lots settled to maintain a pipeline of over 27,000 lots. Buying at the low point in the cycle supports strong embedded margins benefiting for future revenue growth. Capital-efficient structures provide us flexibility to time projects to align with rising market demand.

Mirvac's extensive built-form capability, where we own the full outcome across our projects is a true competitive advantage. We harness the talent of our in-house integrated model to reimagine urban life and to take diverse, connected and resilient communities wherever we develop. We do this across a wide range of built-form products and price points to meet the needs of a diverse purchaser group. Our ability to create and deliver all aspects of built-form provides greater certainty of delivery as well as ensuring whole of place outcomes. The recent COVID pandemic has further highlighted the importance of investing in built-form quality, amenity and broader social infrastructure and has helped our projects remain resilient during this period.

Overall, the next few years, the expectations of our customers and governments will only increase as they demand more from developers. We are in a unique position, which allows us to incorporate the learnings over 48 years of experience to continually innovate across both product and place from greenfield development to whole inner city precincts. This is the real Mirvac difference and sets the standard against all other developers.

Looking ahead, while there is a level of uncertainty, COVID and its broader economic impacts will create challenges, but will also present opportunities, which we are very well positioned to capitalize on. Improved partnering with government during the COVID period has assisted us to unlock projects where government and partners trust us to deliver quality, progressive developments. Our significant pipeline of shovel-ready projects supported by capital-efficient structures and balance sheet strength provides us the opportunity to align project timings to capitalize on the dramatic drop in building commencements. We expect to see greenfield MPC markets recover first, driven by first-time buyers, followed by middle ring demand and then higher density apartments. Subject to market conditions, we plan to launch 8 new projects during FY '21 and have over 1,000 further lots we can bring to market if required.

While broader market concerns around built-form quality continue, we expect purchases to gravitate to larger developers with a reputation for quality and delivery. Mirvac is well positioned to capitalize on this demand. The next few years will see a greater shift to MPC following our strategic decision to not restock apartments during the peak of the cycle. This decision has proven to be even more beneficial given the current circumstances where we don't have a significant number of apartment projects to settle and instead, we'll be able to invest in bringing projects to market in line with recovery. We have taken decisions during the year to put ourselves in an even stronger position through active capital and cash management, continued disciplined pipeline restocking and being shovel-ready in our core markets to respond to the pending undersupply of quality product. We have strategically and diligently navigated the cycle strongly positioning the business to take full advantage of the opportunities in the years ahead.

Thank you, and I'll now hand back to Sue.

--------------------------------------------------------------------------------

Susan Lloyd-Hurwitz, Mirvac Group - CEO, MD & Executive Director [7]

--------------------------------------------------------------------------------

Thank you, Stuart. I'm going to end on this note. In what is undoubtedly an extraordinary time, what can you expect from us going forward? You can expect us to continue the disciplined delivery of our future pipeline supporting our purpose to reimagine urban life. We will only commence projects when the conditions are right. We will keep focused on cost control. We will continue to invest in operational efficiency such as the technology and process investments we've been making for some time. We'll protect the strength of the balance sheet and continue to work with our capital partners. And we will remain committed to our purpose and to our values, to sustainability, diversity and inclusion and innovation.

Thank you, and we'll now open up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question in queue comes from the line of Sholto Maconochie from Jefferies.

--------------------------------------------------------------------------------

Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [2]

--------------------------------------------------------------------------------

Just a few for me. On the rent collection rates, could you provide one for industrial for 4Q '20 in FY '20? I couldn't see it in the pack?

--------------------------------------------------------------------------------

Campbell Hanan, Mirvac Group - Head of Office & Industrial [3]

--------------------------------------------------------------------------------

They are -- Sholto, they're actually exactly the same as the office portfolio.

--------------------------------------------------------------------------------

Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [4]

--------------------------------------------------------------------------------

Okay. Cool. And then...

--------------------------------------------------------------------------------

Campbell Hanan, Mirvac Group - Head of Office & Industrial [5]

--------------------------------------------------------------------------------

They are 98% and 93%.

--------------------------------------------------------------------------------

Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [6]

--------------------------------------------------------------------------------

98% and 93%, perfect. And then just on the resi presales, Stuart touched on it. Obviously, clearly, with some less apartments in the contract that you have and you haven't launched, that's probably the main driver of being lower. But if you look at the presales in the period, $744 million, there's quite a big rebound on the 2 year-on-year, it's about 28% on the sort of second half, and 34%. What is the sort of driver of that increase? Does it mean that MPC product coming back strongly? Can you talk a little bit of the demand on that MPC product that's driving those presales?

--------------------------------------------------------------------------------

Stuart Penklis, Mirvac Group - Head of Residential [7]

--------------------------------------------------------------------------------

Yes, Sholto. So it's obviously federal stimulus has been a huge boost to the MPC business. Just to give you some color. In -- predominantly in WA and Queensland, obviously, at those price points, but just to give you some color from a leads perspective, in June, we saw a 200% increase in leads in WA, 120% increase in June and nearly a 300% increase in exchanges in WA, just off the back of that stimulus. So obviously, huge volumes and volumes we haven't seen for a long time.

--------------------------------------------------------------------------------

Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [8]

--------------------------------------------------------------------------------

Okay. And then just on the resi stuff. If you look at this, you obviously beat your target, that you withdrew earlier in the year. But if you take out the apartment settlements, which are about 941 in that number, that's about 1,622. I appreciate you can't give guidance, but sort of based on the run rate without apartments, you'd be doing sort of 1,622 lots. Do you have a sort of range that you're looking for because most of it appears to be MPC this year?

--------------------------------------------------------------------------------

Stuart Penklis, Mirvac Group - Head of Residential [9]

--------------------------------------------------------------------------------

Yes. I suppose it's difficult for us to give you any further color on that, Sholto, at this point in time. But obviously, we are still in a market that has a huge amount of uncertainty. And it's difficult to give you some further color on that at this very point in time.

--------------------------------------------------------------------------------

Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [10]

--------------------------------------------------------------------------------

And then you comment on the -- obviously, clearly, the MPC market then and in the middle ring sort of townhomes and apartments that are to recover. Just in query, in your Slide 77 on the additional info, you're still going to launch -- expected to launch 3 apartment projects, will it be Green Square and Waterfront? And what makes you confident that you'll launch them this year, given your commentary about apartments being a bit weak still?

--------------------------------------------------------------------------------

Stuart Penklis, Mirvac Group - Head of Residential [11]

--------------------------------------------------------------------------------

Yes. Look, I think that there's obviously a reduction in demand, but there's also a reduction in supply, and we're seeing completions really fall off a cliff. And it goes back to quality product in the core markets and from my perspective and the team's perspective, we're actually quite excited to launch those projects, particularly Green Square, where we think there is absolutely an undersupply of quality product, and we'll be in a good position to capitalize on that demand, particularly over the next few years, when we think there's going to be very little competition.

--------------------------------------------------------------------------------

Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [12]

--------------------------------------------------------------------------------

And will that have a -- Green Square have have a townhome component to it? Or is it pure apartments?

--------------------------------------------------------------------------------

Stuart Penklis, Mirvac Group - Head of Residential [13]

--------------------------------------------------------------------------------

It's a combination of apartments and a select few terraces in that next stage.

--------------------------------------------------------------------------------

Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [14]

--------------------------------------------------------------------------------

All right. And then just on the government, on the land tax. You've been the first mover build-to-rent. The 50% concession on land takes. How does that change your view on ramping up the New South Wales, build-to-rent sites? And are you looking to do more of that now?

--------------------------------------------------------------------------------

Susan Lloyd-Hurwitz, Mirvac Group - CEO, MD & Executive Director [15]

--------------------------------------------------------------------------------

It certainly does make New South Wales a leader around Australia in supporting this sector, and it does change the dynamic of future sites. And hopefully, we'll be able to fund more that we can do in New South Wales. You clearly see that of the projects that we've got under control, 3 of them are in Melbourne, which reflects the different economics there. But absolutely, very welcome, and we're looking forward to the Victorian government following suit.

--------------------------------------------------------------------------------

Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [16]

--------------------------------------------------------------------------------

And then on the resi, sometimes you normally provide, appreciate it's a different year with COVID resi EBIT secured. Do you -- Can you provide how much of resi EBIT you think could be secured based on your presales or a percentage range?

--------------------------------------------------------------------------------

Susan Lloyd-Hurwitz, Mirvac Group - CEO, MD & Executive Director [17]

--------------------------------------------------------------------------------

64%.

--------------------------------------------------------------------------------

Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [18]

--------------------------------------------------------------------------------

Okay, 64%. And then just the last one. You mentioned you got some assistance in the pack from the government. Was that in the form of job keeper? Can you say how much?

--------------------------------------------------------------------------------

Susan Lloyd-Hurwitz, Mirvac Group - CEO, MD & Executive Director [19]

--------------------------------------------------------------------------------

That's correct. It was job keeper, and it was $9 million.

--------------------------------------------------------------------------------

Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [20]

--------------------------------------------------------------------------------

Okay. And then finally, you're previously guiding to positive income CAGR of 5% from '19 to '21. How much has that changed due to COVID, 10%, 20% down, so sort of 4% to 5%, 4% CAGR now? Or is it too hard to give that number with the uncertainty?

--------------------------------------------------------------------------------

Susan Lloyd-Hurwitz, Mirvac Group - CEO, MD & Executive Director [21]

--------------------------------------------------------------------------------

Well, a lot of that number is driven by not only the underrenting in the portfolio and this -- the lease steps that are in place leases, but by the income that we're delivering. And so we do continue to see strong delivery of income, obviously, with a slightly lower amount of delivery over the next couple of years, but thereafter, another 750,000 square meters of NLA, which is going to drive that passive income growth.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Your next question comes from the line of Darren Leung from Macquarie.

--------------------------------------------------------------------------------

Darren Leung, Macquarie Research - Analyst [23]

--------------------------------------------------------------------------------

A few for me. One, just on office leasing, Campbell. So it looks like if you look at the quarterly update, it was like 46,000 square meters done up until the third quarter. You're reporting 48,500 square meters for the full year. So I think it looks like you've done about 2,000 square meters in the fourth quarter. And so looking at your metrics, most of your spread is still positive ,which is reasonably low. But can you give us an indication as to what your leasing spreads have done, I suppose, deals in the fourth quarter and in the last 6, 8 weeks or so?

--------------------------------------------------------------------------------

Campbell Hanan, Mirvac Group - Head of Office & Industrial [24]

--------------------------------------------------------------------------------

Sure. Thanks, Darren, and you're 100% right. The fourth quarter really saw a freezing of leasing activity in office markets, and I certainly don't think we're alone. And you're right, just over -- around about 2,000 square meters of lease deals done in the fourth quarter. And you're right, yes, the -- looking backwards, we had a great year in terms of leasing spreads and incentives, and certainly, our focus on pulling forward as much lease expiry in FY '21, '22 and '23 in the first half of the year was prudent.

And certainly now, what I would say is that incentives are starting to increase quite significantly from where they were only a quarter ago. So I think going forward, you're probably more likely to see incentives in the bands in Sydney of 25% and even higher. And I think Melbourne is now sort of holding that 30% range. So certainly, we'll expect to see some deterioration in effective rent growth as a result.

--------------------------------------------------------------------------------

Susan Lloyd-Hurwitz, Mirvac Group - CEO, MD & Executive Director [25]

--------------------------------------------------------------------------------

I would just add to that, Darren, that there'll be a clear differentiation between buildings, which are fit-for-purpose and those which are going to be rapidly obsolete in Campbell's remarks around health and safety, touchless technologies, our floor plates that are adaptable for how our customers want to use office space into the future. As we've stepped on the accelerator of all of those trends, and we will see increasing bifurcation between buildings that our customers want to occupy and ones which just don't suit anymore.

--------------------------------------------------------------------------------

Campbell Hanan, Mirvac Group - Head of Office & Industrial [26]

--------------------------------------------------------------------------------

And Darren, I'd just finish up by also just reminding you that the numbers that we think are going to be pretty important in the next couple of years is the expiry profile in '22 and '23 because certainly, I think what the data is showing us right now is that a lot of tenants are unwilling to move in this environment. And so turnover is particularly low, and we're seeing that in our leasing numbers, particularly in the fourth quarter. But what it also now shows is that as we get through this event, having 2023 and -- '22 and '23 somewhat derisked and a relatively low expiry profile, we think is going to be very prudent for us going forward.

--------------------------------------------------------------------------------

Darren Leung, Macquarie Research - Analyst [27]

--------------------------------------------------------------------------------

Of the deals you've been completing in the last fourth quarter and first quarter '21, what's the average lease term modulation?

--------------------------------------------------------------------------------

Campbell Hanan, Mirvac Group - Head of Office & Industrial [28]

--------------------------------------------------------------------------------

So we've got about 7,500 meters of deals in Heads of Agreement, and we've got lots of small deals obviously associated with COVID-style leasing also underway. For the sort of the larger deals, we're sort of averaging about 6 years extensions. And so -- and look, it's a real mixed bag on -- in terms of where the incentive levels are. But it's starting to -- I would say we're starting to see a little bit more activity in the space of the last 2 weeks compared to what we saw a month ago.

--------------------------------------------------------------------------------

Darren Leung, Macquarie Research - Analyst [29]

--------------------------------------------------------------------------------

Okay. That's a good outcome and in line with your '22, '23 comment. Second question is just on retail. So quite similar, but looking at the slide in your additional pack on Slide 69. So it looks like you've done with 14,000 square meters, again, not the biggest number. But any update in terms of what the typical lease structure looks like in a post-COVID world?

--------------------------------------------------------------------------------

Susan MacDonald, Mirvac Group - Head of Retail [30]

--------------------------------------------------------------------------------

It's probably too hard to tell at this stage because we're still in a COVID world, unfortunately. So we did 29 deals in the fourth quarter. And the majority of those were renewals. We're running positive spreads up to Christmas, but obviously, that's turned negative. And really, what we're looking to do, particularly through the COVID assistance packages and negotiations that we're doing is to extend current lease terms. So 80% of the deals that we have actually -- or the deals that we have completed, we've looked to extend those lease terms greater than 6 months. Because I think really what we're conscious of doing is trying to work out where this is going to land coming into the new year, so where we can get a lease extension, that's our preference at this point.

--------------------------------------------------------------------------------

Darren Leung, Macquarie Research - Analyst [31]

--------------------------------------------------------------------------------

And incentives releasing spreads provided for the quarter?

--------------------------------------------------------------------------------

Susan MacDonald, Mirvac Group - Head of Retail [32]

--------------------------------------------------------------------------------

Again, it's just to -- on the renewal, it's generally fairly low incentives, and we just haven't done any new deals really in the last quarter or over the last few so we haven't given out any incentives at this stage. Unless you take the rental abatement, which, again, if we can look at longer lease term in FY '21 going forward, they would constitute commercial deals. And we probably look to capitalize some of that abatement if we can get term longer than, for example, than 12 months. So it's really work in progress at the moment, and it's probably a bit too early to draw any common themes out of that.

--------------------------------------------------------------------------------

Darren Leung, Macquarie Research - Analyst [33]

--------------------------------------------------------------------------------

Yes. I understand. Just change of track a bit around the 750,000 square meter pipeline. So given what COVID has done to the world, have you thought about how quickly this can shift between office, retail and build-to-rent and resi? And then what is that current allocation in that pipeline?

--------------------------------------------------------------------------------

Susan Lloyd-Hurwitz, Mirvac Group - CEO, MD & Executive Director [34]

--------------------------------------------------------------------------------

I'll start with that and then Brett can add on. Really, we've been doing a lot of work with our customers using our Hatch innovation team to try and understand what things have changed that will stay changed and what things have changed that will revert to how they were before. And how does that change how people will use space in our cities right across all of our sectors. And the great benefit of our integrated model is our ability to compete -- complete projects right across those sectors and respond to where customer demand is. The 750,000 is well-known in terms of what projects are in there. Certain projects like Harborside, for example, being office and retail. We probably are seeing more mixed-use, built-to-rent and industrial is a theme that's coming through that 750,000.

--------------------------------------------------------------------------------

Brett Draffen, Mirvac Group - CIO [35]

--------------------------------------------------------------------------------

Yes. Thanks. So probably some additional commentary. As you saw on that slide, on Page 20, I think you can see that the diversity of that forward pipeline in terms of mix, clearly, we've still got a high-quality office portfolio and our future pipeline, which we think has been acquired on the right sort of terms. And basically, most of those projects are sitting there with income in place, and we can be quite flexible about how we turn them off and turn them on based on their development approval timing and also any pre-leasing. So the majority of that portfolio you see is not development sites sitting there with no income. It's development sites sitting there with income in place, redevelopment clauses in place, and we can turn off appropriately. So that's an important point.

The other thing I'd say is you've definitely seen us, I guess, remixing to a greater percentage of, obviously, the growing industrial portfolio. You've seen a hugely increased effort around mixed use. And I think Mirvac is, I think, one of the few groups that's ideally placed, given its integrated skill set, to play right across the full suite of sectors in the mix-used space. And I think you've seen strong execution on that. And likewise, the BTR portfolio, obviously ideally well placed and certainly leverages the Mirvac brand. So expect us to keep doing it, but expect us to keep doing it in a disciplined stance where we're not just going to start developing sites without an appropriate level of derisking. So that's, I think, the important part.

But again, that pipeline is secured. It's controlled, and it's really up to us to unlock the next stages through development approval or pre-leasing to get them into the construction phase. But in the way we think about it, all that's in our control, and it's not about buying those sites on market, it's already in the pipeline.

--------------------------------------------------------------------------------

Darren Leung, Macquarie Research - Analyst [36]

--------------------------------------------------------------------------------

Okay. Just a final one on Campbell's comment around $80 million of development EBIT. Can you give an indication as to what projects contributed and how much to that $80 million? And then is there any left in those projects for future years to be recognized and Hatch?

--------------------------------------------------------------------------------

Campbell Hanan, Mirvac Group - Head of Office & Industrial [37]

--------------------------------------------------------------------------------

Yes. Thanks, Darren. So look, roughly 2/3, 1/3 to 477 Collins Street and Building 2 at South Eveleigh. And yes, there's still quite a bit of residual profit left that we will look to allocate this year. And again, I think from a development risk perspective, we still got a small amount of vacancy, 4% vacancy in the older fleet building. So we are carrying incentives and time, which is certainly part of the contingencies that can be released as we're successful on the leasing front. So there's a little bit to come.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

Your next question comes from the line of Richard Jones from JPMorgan.

--------------------------------------------------------------------------------

Richard Barry Jones, JPMorgan Chase & Co, Research Division - VP [39]

--------------------------------------------------------------------------------

Two quick ones. Just in terms of -- this is on retail leasing. In terms of the short-term deals, so can you clarify the typical terms that you're entering into in terms of how long and how rents are rebased on the assistances?

--------------------------------------------------------------------------------

Susan MacDonald, Mirvac Group - Head of Retail [40]

--------------------------------------------------------------------------------

Well, we're typically not looking to rebase rents in these negotiations. So typically, it would be...

--------------------------------------------------------------------------------

Richard Barry Jones, JPMorgan Chase & Co, Research Division - VP [41]

--------------------------------------------------------------------------------

No, I'm sorry. I was referring to how are the rents based on the short-term assistance component? And when did that revert back to the standard lease?

--------------------------------------------------------------------------------

Susan MacDonald, Mirvac Group - Head of Retail [42]

--------------------------------------------------------------------------------

Yes, okay. So generally, the average time we're giving is -- and it depends on whether or not it's an SME, what the category is, and you can appreciate we're only 30% through those deals. But 80% of them, as I said previously, we've looked to extend the lease term. And typically, we're looking to abate the rent. The preference of most retailers is not to defer. And you can understand that, I think, given where that uncertainty of where retail sales are going to go. So typically, we're looking to abate and then to extend, that is our preference. And that abatement term would depend on the category.

So we've gone through about 55% of our SMEs. And the major focus, particularly on those is definitely in food and beverage, where we're seeing a lot of pain come through where there's been mandated closures. So it's a variety of deals. But at the moment, the average term is about 3 months of rent, and that is spread across abatement and then, as I said, lease term and then expiring around September, October when a lot of the -- when we're hoping that obviously, things will revert to norm.

--------------------------------------------------------------------------------

Richard Barry Jones, JPMorgan Chase & Co, Research Division - VP [43]

--------------------------------------------------------------------------------

Okay. And are the rents based on the sales? Or are they based on...

--------------------------------------------------------------------------------

Susan MacDonald, Mirvac Group - Head of Retail [44]

--------------------------------------------------------------------------------

No, we're trying -- sorry, our preference is definitely to look at the base rent and what we can do there. It's fair to say that we have done a limited number of deals where it may also be linked to their pre-COVID occupancy costs, and they're probably -- but they're fewer. I mean, generally, what we're trying to do is a clean abatement for a period of time for a percentage of the rent and a lease extension.

--------------------------------------------------------------------------------

Richard Barry Jones, JPMorgan Chase & Co, Research Division - VP [45]

--------------------------------------------------------------------------------

Okay. And just a second question, just in relation to the $23 million new business and project costs that you've called out, maybe for Shane. Can you give us a bit more clarity as to what is in that? And was there a corresponding number in FY '19?

--------------------------------------------------------------------------------

Shane M. Gannon, Mirvac Group - CFO [46]

--------------------------------------------------------------------------------

Yes. So I might hand over to Stuart for part of the response, particularly around some of the future project schemes. He can give you a bit more color on that. But with new business, as you would expect, each year, we would undertake a broad range of new business activities, and we capitalize some of those as we work through the -- and evaluate those opportunities. In FY '20, obviously, with COVID, we've applied a greater scrutiny to those new business costs, particularly longer-dated ones, and we've taken a more cautious or conservative view and written off.

So in terms of the specifics, I would say, normal run rate is around 5% to 6% per annum, it can be higher. And this year, it's about half of that $23 million is new business. But it varies, Richard. When we're doing bids for projects and we lose, then unfortunately, the cost of that is quite material. So it can vary from year-to-year, but that's probably my best answer on new business.

And Stuart, maybe you just want to give a bit of color on the project schemes and how we've thought about that.

--------------------------------------------------------------------------------

Stuart Penklis, Mirvac Group - Head of Residential [47]

--------------------------------------------------------------------------------

Yes, certainly. So in terms of, I suppose, the other half of that, that Shane is referring to it, it's really where we've had a significant change in a scheme, a planning scheme. And an example of it is down at Yarra's Edge, where one of the precincts, there has been a significant change to a design of one of those precincts. And it largely relates to the fact that government recently announced the extension of the Tram into Yarra's Edge. We'd previously designed up that precinct, and those designs have now dramatically changed in -- to take advantage and to respond to that public transport connection into Yarra's Edge, which from a Mirvac perspective, we've been waiting a long time for public transport into Yarra's Edge. So it's a fantastic announcement, but obviously, we've had to make some adjustments, which will benefit significantly to those future towers down at Yarra's Edge.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

Your next question comes from the line of Tom Bodor from UBS.

--------------------------------------------------------------------------------

Tom Bodor, UBS Investment Bank, Research Division - Director [49]

--------------------------------------------------------------------------------

I just wanted to ask about the capital strategy for build-to-rent. Obviously, looking at the current projects you're progressing them predominantly on balance sheet. And I just wanted to understand, is the strategy to derisk those projects before selling down to partners? Or would you consider bringing partners alongside you through the development phase?

--------------------------------------------------------------------------------

Susan Lloyd-Hurwitz, Mirvac Group - CEO, MD & Executive Director [50]

--------------------------------------------------------------------------------

The -- what we've said for a while, and now we're well on the path to doing so is to prove up the customer proposition to prove that this will lease well and that it is the right proposition for customers, which, given the response that we've had already at LIV Indigo, we're very certain that, that is indeed correct, but we would like to be able to prove up that cash flow for investors, and we'll continue to look at selling down in the fullness of time when the time is right and the proposition is proven. There's certainly no lack of demand globally for this income stream. As Brett said in his comments, has proved to be extremely resilient through COVID. Brett, do you want to add to that?

--------------------------------------------------------------------------------

Brett Draffen, Mirvac Group - CIO [51]

--------------------------------------------------------------------------------

Yes, exactly. It's always been part of our strategy to look at a capital partner coming in and as Sue said, the strategy was always to go -- shall we say balance sheet-heavy to secure the pipeline and prove up the model. Bringing a capital partner in is part of our strategy, but it's probably more of a calendar year '21 time horizon rather than this year.

--------------------------------------------------------------------------------

Tom Bodor, UBS Investment Bank, Research Division - Director [52]

--------------------------------------------------------------------------------

Do you have indications of interest today already?

--------------------------------------------------------------------------------

Brett Draffen, Mirvac Group - CIO [53]

--------------------------------------------------------------------------------

Yes. Look, I think we've had numerous discussions with various parties, both offshore and domestic. I think, as you'd imagine, particularly in this environment, there's a growing demand set for participation in BTR. I think a lot of the foreign capital was probably sitting off to the sidelines a little bit, looking for, I guess, a bit more direction from federal and state governments. We've partly seen that, particularly in New South Wales.

Domestic capital, again, I think you've seen -- or certainly, we've seen probably the level of inquiry from domestic capital certainly ramp-up in the last 3 months. And we would expect that level of demand to continue. I think equally, you've seen both a growing domestic and offshore capital exposure, I guess, in general activity in the market as well. So I think there's a critical mass emerging. I think as Sue said, the important bit now is to prove up the underwrite, shall we say, around the leasing and the rental. And I think with that, you'll see an increased weight of capital come into this sector.

--------------------------------------------------------------------------------

Tom Bodor, UBS Investment Bank, Research Division - Director [54]

--------------------------------------------------------------------------------

Okay. And one final one on the BTR is. Are you sort of seeing more opportunities to acquire sites? Or is there any distress out there in wholesale sites?

--------------------------------------------------------------------------------

Brett Draffen, Mirvac Group - CIO [55]

--------------------------------------------------------------------------------

Yes. I probably wouldn't classify it as distress yet. And I think, particularly with the, I guess, the SIV that Mirvac applies off over sort of the criteria around site selection, we're very focused in terms of the sites we look at. And therefore, generally, quality sites don't often trade at distressed prices, but there's definitely more opportunity. And I would say our new business capability is probably as busy as it has been looking at potential opportunity.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

Your next question in queue comes from the line of Lauren Berry from Morgan Stanley.

--------------------------------------------------------------------------------

Lauren A. Berry, Morgan Stanley, Research Division - Equity Analyst [57]

--------------------------------------------------------------------------------

Just one from me. You've called out a timing miss of around $32 million. Looks like it's in resi. Just interested what that miss is relating to, given that you guided to over 2,500 settlements. You reported 2,586 settlements today. So were you expecting significantly higher than that guidance level in your original forecast for the year?

--------------------------------------------------------------------------------

Stuart Penklis, Mirvac Group - Head of Residential [58]

--------------------------------------------------------------------------------

Yes, Lauren, it's -- look, it really just relates to the fourth quarter and some of those really high-margin MPC projects coming through like a Tullamore, where there was a slight delay in terms of purchases and their ability to settle on time, really driven by COVID. So that -- you've got to remember, obviously, when you look at lots and you try to interpret the variance between the different contributions from lots can vary, and Tullamore is one of those projects that has very high embedded margins and is a big contributor. So it's largely due to Victorian MPC.

--------------------------------------------------------------------------------

Lauren A. Berry, Morgan Stanley, Research Division - Equity Analyst [59]

--------------------------------------------------------------------------------

Right. Okay. And in your presales, you've got a lot of presales subject to conditional exchanges. So could you just clarify what the conditions are around those contracts?

--------------------------------------------------------------------------------

Stuart Penklis, Mirvac Group - Head of Residential [60]

--------------------------------------------------------------------------------

Yes. Look, it's just normal MPC contracts, predominantly in WA where they're subject to finance for a period of time.

--------------------------------------------------------------------------------

Lauren A. Berry, Morgan Stanley, Research Division - Equity Analyst [61]

--------------------------------------------------------------------------------

Okay. Great. And on the development pipeline, just in terms of the locomotive shed, has there been any interest from potential capital partners in that asset? And when can we possibly expect any update on the sale?

--------------------------------------------------------------------------------

Susan Lloyd-Hurwitz, Mirvac Group - CEO, MD & Executive Director [62]

--------------------------------------------------------------------------------

We said in our remarks that, that would be something we would look for a capital partner this year coming up. And certainly, there's been a lot of interest in the asset, both from customers and from capital as well. It's quite a unique asset, and we're looking forward to being able to put it to market. And we're actually doing some of the marketing virtually because it's very difficult to inspect buildings in the current environment. And I think if you saw it, you would agree, it's a pretty special building.

--------------------------------------------------------------------------------

Lauren A. Berry, Morgan Stanley, Research Division - Equity Analyst [63]

--------------------------------------------------------------------------------

Right. Okay. And then just final one for me. Just on the payout ratio decision, the 65% to 75%, that's a fair bit lower than what you've paid in the past. Just marrying that up with the fact that you've called out reduced maintenance CapEx spend. You've got less developments kicking off. You've got low gearing, a good balance sheet and your rent collection is pretty high. So putting that all together, you'd expect that your passive earnings percentage would be a greater proportion of your earnings in previous years. So are you essentially implying through a lower payout ratio that you're expecting more asset write-downs? Or is this more around how to fund your CapEx going forward?

--------------------------------------------------------------------------------

Susan Lloyd-Hurwitz, Mirvac Group - CEO, MD & Executive Director [64]

--------------------------------------------------------------------------------

That range is largely in line with what we've been paying out for the last several years. So it isn't really a significant reduction. We've been paying around that 70% mark for the last several years. But as you point out, there are a lot of things to balance in those decisions.

--------------------------------------------------------------------------------

Shane M. Gannon, Mirvac Group - CFO [65]

--------------------------------------------------------------------------------

And what I'll just add, Lauren, that the FY '19 result, the payout was 68%. So just reinforcing what Sue just mentioned. It's within that sort of historical range that we've provided. But I can assure you, given what the current environment prevails, we have taken a lot of factors into consideration. So we've attempted to give some guidance. But given the uncertain markets, we do have an element of caution in terms of when we think about distributions.

--------------------------------------------------------------------------------

Lauren A. Berry, Morgan Stanley, Research Division - Equity Analyst [66]

--------------------------------------------------------------------------------

Great. And any view on asset valuations over the next 6 months?

--------------------------------------------------------------------------------

Susan Lloyd-Hurwitz, Mirvac Group - CEO, MD & Executive Director [67]

--------------------------------------------------------------------------------

I think it's really too early to tell where asset valuations will go. There's a lot that has to get resolved. There are clearly some changes in the economy when we get past the stimulus and support here, and nobody really knows what that looks like. And so that -- I think it really is too early to make predictions around that.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

And you have a follow-up question from the line of Sholto Maconochie from Jefferies.

--------------------------------------------------------------------------------

Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [69]

--------------------------------------------------------------------------------

Just quickly. On the rent collection, you said 85% billed. So that left $63 million in outstanding. If you take the $9.9 million waive and the $8.4 million provided for, that was a $48 million hit. So it's about $14.9 million outstanding. But you said you've collected 90% at August. So that if you add the 90% to what you've -- that's about a $21.9 million increase. So does that mean the provisioning was too excessive because you've collected more than you thought? Is that the way to look at it?

--------------------------------------------------------------------------------

Shane M. Gannon, Mirvac Group - CFO [70]

--------------------------------------------------------------------------------

Trust you to pick that up. That's what I would say that our response is that the provisioning that we did at the 30th of June was appropriate. And there's a slight cash improvement. But I think the salient point is that the provision that we provided in the accounts at 30th of June was appropriate.

--------------------------------------------------------------------------------

Operator [71]

--------------------------------------------------------------------------------

There are no further questions in queue. Ms. Susan Lloyd, please continue.

--------------------------------------------------------------------------------

Susan Lloyd-Hurwitz, Mirvac Group - CEO, MD & Executive Director [72]

--------------------------------------------------------------------------------

Well, thank you very much for spending time with us this morning, and we look forward to meeting with you one-on-one or talking further this afternoon. Thank you very much.